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Patent Monopolies: The Reason Drug Companies Pushed Synthetic Opioids Print
Monday, 25 August 2014 04:38

The New York Times reported on lawsuits being filed by the City of Chicago and two California counties over the promotion of painkillers. The suit charges that the companies promoted OxyContin and other drugs for uses where they may not have been appropriate or necessary and deliberately downplayed risks of addiction and overdose.

It would have been worth noting that the reason the companies being sued had incentive to push their drugs was the high profit margins provided by patent monopolies. If these drugs had been sold in a free market in which the drug companies enjoyed the same profit margins as companies selling steel or bread, it never would have been profitable to spend tens of millions of dollars pushing their drugs for inappropriate uses.

However because patent monopolies allowed them to charge prices that were several thousand percent above the free market price, companies could make substantial profits by getting people to use their drugs even in cases where they may not have been appropriate. It would have been worth noting this basic fact, just as an article reporting on shortages of a particular product should mention that the government imposes price controls on the product.

 

Correction: "Synthetic" was added to the headline in the interest of accuracy. Thanks to Fred Gardner for the correction.

 
Will Robots Help Your Employment Prospects? Autor and Yglesias Print
Monday, 25 August 2014 04:08

The usually astute Matthew Yglesias falls off the track with his discussion of David Autor's latest paper on technology and wages. For background, Autor is the guru of the job polarization story: the idea that technology is destroying middle-paying jobs leaving only those at the top and bottom. He presented a new paper at the Fed's annual conference at Jackson Hole which reassesses his prior work.

Matt's take on this paper has Autor telling us that robots may not take our jobs, but they will cut our pay. That isn't the story as I see it. Technology always devalues some jobs while increasing the productivity and wages of other jobs (that's why average wages are higher today than they were 100 years ago). New technologies like robots will not be different in this respect.

What's new and newsworthy in the Autor paper is the acknowledgement that his occupation story really cannot explain trends in wage inequality. Here's a figure from Autor's paper that Matt uses in his post.

skills

Note that there is no job polarization in the period 2000-2007 and only very modest high end job growth in the period 2007-2012. The main story in these periods is the growth in the share of low-end occupations. Yet we continued to see a sharp increase in high end wages relative to everyone else.

This is a problem not only for the post-2000 period, but for the whole period. If high-end wages increase relative to other wages when their occupation share is not rising in the period 2000-2012, why would we think that the mix of occupations explains wage trends in earlier periods? And of course the sharpest increase in shares is for occupations at the bottom end of the skills distribution, the workers who have seen the sharpest drop in relative wages in the years since 2000 as well as the longer period since 1979.

In other words, there is no link between changes in occupation shares and wage trends, a point that my friends and colleagues, Larry Mishel, John Schmitt, and Heidi Shierholz, have been making for several years. These points in Autor's new paper appeared in their paper, Don't Blame the Robots. (Autor was a discussant of an earlier version of this paper at the American Economic Association meetings in 2013, although it is not cited in his new paper.)

Anyhow, given the eagerness with which the punditry embraced Autor's hollowing out of the middle story, the fact that he has now moved away from it should be big news. This means that the economics profession does not have a way to blame the growth of wage inequality on technology. And if it wasn't technology that gave us inequality, then we might start thinking about policy. 

 

 
David Autor Discovers the Rebirth of Middle Skill Jobs Print
Sunday, 24 August 2014 07:56

Neil Irwin had a write-up of new research by M.I.T. economist David Autor explaining why the development of technology need not lead to a further growth in wage inequality. Autor's new work is especially noteworthy because Autor had previously been associated with the occupational polarization view that held that technology and globalization were wiping out middle wage jobs. This view was widely held up by the punditry as the major cause of wage inequality.

In Autor's paper, he concedes that the job polarization pattern he identified as having taken place in the 1980s and 1990s had stopped in the period since 2000. In fact, the bulk of the job creation since then has been at the bottom end of the occupational distribution with middle wage and high wage occupations mostly falling as a share of the workforce.

In this way, the paper is agreeing with the paper by Larry Mishel, John Schmitt, and Heidi Sheirholz, which showed there was no link between the patterns of job polarization identified by Autor in earlier work and the trends in wage inequality over the last three decades. (Autor was the discussant on this paper when it was presented at the American Economic Association convention in 2013, although he does not cite it in his new paper.)

 

Note: This post is a correction from an earlier version which cited an old column from David Autor and David Dorn rather than the piece by Irwin.

Further note: Adam Davidson had a piece last year on the exchange between Larry Mishel and David Autor.

 
Should Taxpayers Subsidize the Pay of College Presidents? Print
Sunday, 24 August 2014 07:43

Colman McCarthy has a piece discussing the low pay received by many adjunct professors across the country. He argues that they should make a living wage and then suggests that a way to pay for this would be to cut the high salaries for university presidents and other top administrators, which can cross $1 million a year.

It is worth noting that universities, both public and private, operate with large taxpayer subsidies. In the case of private universities, most enjoy tax-exempt status. As a result, they are exempt from many state and local taxes, but most importantly, individuals can deduct their contributions from their income tax. For wealthy contributors, this means that the taxpayers are effectively picking up 40 percent of the cost of their contributions.

If the public felt it was more important that adjuncts made $40,000 a year than university presidents made $1,000,000 a year, there could be a limit on compensation levels that would allow an institution to receive tax-exempt status. For example, if the cap for total compensation was set at $400,000, university presidents would still be able to earn twice as much as cabinet officers

Of course universities would complain about such a restriction as government interference, but this is nonsense. They are free to pay their staff absolutely as much as they like, the restriction only applies if they want a government subsidy. (It's sort of like restrictions the government imposes on people who get TANF.)

The universities will also complain that they cannot get qualified people for $400,000 a year. This one should invite a healthy dose of ridicule. If we can get qualified people to run the Defense Department and Department of Health and Human Services for half this amount, perhaps their school is not the sort of institution that deserves taxpayer support if it can't find anyone willing to make the sacrifice of running the place for twice the pay of a cabinet secretary. 

Free market economics is so much fun!

 
NYT on the Mark on the Fed and Interest Rates Print
Sunday, 24 August 2014 07:17

The NYT had an excellent editorial on the Fed and interest rates today that nailed the main points very well. The piece pointed out that if the Fed raises rates it will slow the economy and keep people from getting jobs. There are two points that would provide a useful addendum to this piece.

First, the Fed's actions on interest rates swamp the importance of almost every government spending program designed to help low and moderate income people. There were big battles in Washington in the last couple of years over Republican proposals to cut food stamps by $4 billion a year. If the Fed keeps the unemployment rate one percentage point higher than a level it could reach without triggering an inflationary spiral then it would be preventing close to 3 million people from working. (A rule of thumb is that for the number of people not currently in the labor force who find a job is roughly equal to the number of unemployed people who find a job.)

In addition to allowing millions more people to work, lower unemployment will vastly improve the situation of people at the lower end of the pay ladder by both allowing them to work more hours (for those who choose to do so) and also by giving them the bargaining power to get higher pay. The analysis by my colleague John Schmitt shows that a sustained one percentage point drop in the unemployment rate translates into 9.8 percent higher wages for workers in the bottom fifth of the wage distribution. For someone earning $20,000 a year, that means a pay increase of $2,000. In short, this is a huge deal for people who really need the money. It matters way more than the potential cut to food stamps, which is not to say people were wrong to fight that cut.

The second point is that the track record of the economists screaming about inflationary pressures and the need to clamp down before we get Zimbabwe-style hyper-inflation is nothing short of abysmal. As Paul Krugman regularly points out (here, for example), these people have been screaming about inflation for the last four years. However the track record is even worse than Krugman's complaints imply.

We have been here before. Back in the mid-1990s the absolute consensus in the economics profession was that the unemployment rate could not get much below 6.0 percent without triggering inflationary pressures. This was a view held not only by conservative economists, but by liberals like Janet Yellen, Alan Blinder, and Paul Krugman. Fortunately, Federal Reserve Board Chair Alan Greenspan was not a mainstream economist. He argued there was no evidence of inflationary pressures, therefore he saw no reason to keep the unemployment rate from falling below the 6.0 percent threshold. 

The unemployment rate fell below 5.0 percent in 1997 and was at 4.0 percent as a year-round average in 2000. Not only were millions of people to get jobs who would not have otherwise been able to work, workers at the middle and bottom of the wage ladder saw sustained real wage growth for the first time since the early 1970s. And, there was a huge swing from budget deficits to budget surpluses, giving the country the budget surpluses that the Clintonites always celebrate.

Anyhow, given the abysmal track record of nearly all economists in predicting the course of inflation and the general economy (can you say collapsed housing bubble?), any economist insisting that the Fed raise rates to prevent inflation should be asked one simple question: when did you stop being wrong about the economy?

 
It's Hard To Get Good Help: Trucking Industry Edition Print
Saturday, 23 August 2014 16:40

Yes folks, apparently we apparently don't have enough people trained as truck drivers. Slate gives us yet another example of the skills shortage in the U.S. economy. Apparently there are not enough truck drivers.

The Bureau of Labor Statistics doesn't publish data directly on truckers' pay, but if we look at the larger category of transportation and warehousing, the data show the real average hourly wage has risen by 1.7 percent over the last seven years. This an annual rate of just over 0.2 percent. 

If we had more skilled people running trucking companies they would realize that they could bid away drivers from their competitors and get more people to learn to drive trucks if they offered higher pay.

 
Condos Are Multi-Unit Properties Print
Saturday, 23 August 2014 09:27

Floyd Norris has an interesting piece documenting the surge in construction of multi-family units at the same time that construction of single-family homes remains weak. He attributes this to a weakness in the sales market with more people renting rather than owning.

This conclusion does not necessarily follow from the data. Many multi-family units are built as condos (come to DC and you will see what I mean). The price of condos in many markets has soared in recent years. The five cities for which the Case-Shiller condo index has data show increases in price since January 2012 of 42.1 percent in Los Angeles, 63.5 percent in San Fransisco, 28.7 in Chicago, 22.8 percent in Boston, and 22.1 percent in New York. It is certainly plausible that the rise in construction of multi-family units is an effort by builders to take advantage of this price surge. 

 
It's Hard to Find Good Help: Chicago Cubs Edition Print
Friday, 22 August 2014 12:40

The media have been full of reports of employers who are too incompetent to raise wages and therefore can't find the workers they say they need (e.g. here). Today Talking Points Memo gave us a story of an employer that apparently doesn't even know the basics of the Affordable Care Act (ACA).

According to the story, the Chicago Cubs cut back the hours of their grounds crew to keep them under the 30 hour weekly limit above which employers are required to provide insurance or pay a fine. As a result of not having the crew available, the team was slow to get out a tarp to cover the field during an expected rainstorm. The poor condition of the field later led the umpires to call the game, which would have left the Cubs with a victory.

However the San Francisco Giants protested the decision, since the poor condition of the field was due to the failure of the Cubs to protect the field promptly. The league agreed with the protest; the first time a protest had been upheld in 28 years.

The problem with this story is that employer sanctions are not in effect for 2014. In other words, the Cubs will not be penalized for not providing their ground crew with insurance this year even if they work more than 30 hours per week. Apparently the Cubs management has not been paying attention to the ACA rules. This is yet another example of the skills gap that is preventing managers from operating their businesses effectively.

 
There Is a Simple Solution to the Conflict of Interest of Bond Rating Agencies Print
Friday, 22 August 2014 05:22

Floyd Norris had an interesting piece discussing the conflict of interest problems with company auditors and also the bond rating agencies that rate securities issued by banks. The basic problem is that since both are paid by the companies who hire them, they have a strong incentive to give a positive assessment regardless of the reality of the situation. This was a huge problem in the housing bubble years when the credit rating agencies gave trillions of dollars' worth of mortgage backed securities top investment grade ratings even though they were filled with dicey mortgages.

In fact, there is a relatively simple solution to the conflict faced by bond rating agencies which actually was put forward as part of Dodd-Frank. Senator Franken proposed an amendment, which was approved overwhelmingly in a bi-partisan vote, which would have had the Securities and Exchange Commission (SEC) pick the credit rating agency. (I worked with Senator Franken's staff on designing this plan.) This plan would have eliminated the conflict of interest since a negative rating would not reduce the probability of being hired for further work.

This amendment was stripped out in conference committee, with the support of the Obama administration, as Timothy Geithner indicated in his autobiography. The argument against the proposal said a great deal about the corruption underlying the debate on this issue.

The concern was supposedly that the SEC might choose a rating agency that wasn't qualified to rate a particular issue. The absurdity of this concern should be apparent on its face. The SEC would not be sending Bozo the Clown to rate these issues, they would be sending professional auditors. Of course the correct way for a professional auditor to respond if they see an issue they don't understand is to say that they can't rate it, which would then allow the SEC to pick an agency that has auditors who can rate it.

However there is an even more basic issue, why are banks securitizing issues that professional auditors can't understand? It is highly likely that if the professional auditors employed by credit rating agencies can't understand an issue then many of the investors who will buy the issue also will not be able to understand it. In that case, it is probably best for the economy that the issue not be marketed.

All of this should be pretty evident on a moment's reflection, but in a world where Wall Street controls the debate on such issues, this simple logic was completely excluded from the debate.

 
Name Calling at the NYT: Argentina and the Vultures Print
Thursday, 21 August 2014 07:14

For some reason the folks at the NYT business desk are having a hard time understanding what is going on with the dispute over Argentine debt. An article today refers to the hedge funds that have forced Argentina into a second default as "holdout investors." It reports that Argentina refers to them as "vultures."

This hugely obscures the basic facts, which are not really in dispute. The funds that have pressed their suit in U.S. courts against Argentina did not hold its debt at the time of the default in December of 2001. They bought it up later at sharply reduced prices. Since purchasing the debt they have tried to use legal pressure to force Argentina to pay the full face value of the bonds.

This is exactly what "vulture funds" do. That is not a term that was invented by Argentina to denigrate these funds, it is a common term used to describe the type of activities that the Elliott Management Corporation (the lead actor in the lawsuit) is pursuing in this case. As a practical matter, there are almost no "holdout" investors involved in this action. Almost all of the original holders of Argentine debt accepted the terms offered by the government. Most of those who did not accept the terms sold their bonds to investors like Elliott Management.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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